PrefBlog

Taper? Schmaper!:

Treasuries rose the most in almost two weeks, pushing the 10-year note yield further below the level when the Federal Reserve voted last month to taper its bond purchases, as economic reports showed an uneven economic expansion.

The benchmark yield reached a seven-week low as an emerging-market currencies selloff amid slowing economic growth and rising social tension stoked demand for safety. Continuing jobless claims rose last week more than forecast, a manufacturing gauge unexpectedly fell this month, pushing yield further below where it stood after the central bank announced Dec. 18 it would reduce its bond purchases to $75 billion per month from $85 billion amid signs of improved economic growth.

Much handwringing over the loony:

The Canadian dollar weakened to the lowest in 4 1/2 years against its U.S. counterpart after Poloz left the main interest rate unchanged yesterday and said the strength of the currency is hurting exporters. Hedge funds and other large speculators have already amassed near-record bets this year for the local dollar to decline as Canada’s trade deficit came in nine times wider than forecast and a report showed the country shed jobs in December.

The drop pushed the currency below the median forecast of C$1.10 per U.S. dollar for the end of the year in a Bloomberg survey of 63 contributors, suggesting strategists will be revising estimates lower. While some investors speculated that the central bank would signal a bias toward easing policy, Poloz said his next rate move depends on how economic data change the balance of risks to the world’s 11th-largest economy.
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Canada’s dollar, often called the loonie for the aquatic bird on the C$1 coin, fell as much as 0.8 percent today to C$1.1174, the lowest level since July 2009, and was at C$1.1117 as of 8:48 a.m. in Toronto. That added to its 1.1 percent slide yesterday. Fair value is around C$1.15, according to [Deutsche Bank global head of Group of 10 foreign exchange Alan] Ruskin.

The loonie is the worst performer during the past one and six months against a basket of nine developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, with declines of 4.9 percent and 8.3 percent. Even so, the Canadian currency is still about 11 percent overvalued compared with its U.S. peer, according the Organisation for Economic Cooperation and Development’s purchasing-power data.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 28bp, FixedResets gaining 14bp and DeemedRetractibles up 26bp. An average-sized Performance Highlights table has a preponderance of winning PerpetualDiscounts. Volume was high.

Here’s a headline we haven’t seen in a while: inflation in Japan:

The Bank of Japan refrained from boosting unprecedented easing as accelerating inflation marks progress in its bid to stamp out 15 years of falling prices in Asia’s second-biggest economy.

Governor Haruhiko Kuroda’s board stuck to its pledge to expand the monetary base by an annual 60 trillion to 70 trillion yen ($671 billion) today after a two-day meeting in Tokyo, in line with the forecasts of all 36 economists surveyed by Bloomberg News. The BOJ maintained its projection that core consumer prices will rise 1.9 percent in the year starting April 2015, excluding the effect of sales-tax increases, and scrapped a reference to the economy facing “uncertainty.”
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Consumer prices excluding fresh food rose 1.2 percent in November from a year earlier, the fastest pace since 2008 and approaching the 2 percent target set a year ago. For the final quarter of 2013, analysts estimate inflation was 1.1 percent, according to a separate poll, nearly three times economists’ 0.4 percent forecast in a survey in April last year.

There’s also an indication of good news from the UK:

The UK’s unemployment rate has surprisingly fallen to 7.1% in the three months to November, according to official figures.

The Office for National Statistics revealed the country’s jobless rate fell by 0.3% from the previous three month and was down 0.5% from June to August 2013.

The figures mean the country’s unemployment rate is just 0.1% off the Bank of England’s 7% threshold for considering interest rate rises.

However, the usual suspect when it comes to bad economic news has not failed us:

The earth movers digging out a sandy pit in the beach town of Biarritz could be any construction site in France. Except the builder of the 300 homes and its workers are Spanish.

In the neighboring town of Anglet, a Spanish company built the concert hall inaugurated this month. A kilometer up the road, in Bayonne, a Spanish company is building a 15-lodging apartment block.

And that’s just in a small corner of southwestern France.

The losing French bidders are crying foul, saying the Spanish pay lower wages and cut corners on regulations. The Spanish, fleeing a construction slump and an unemployment rate of 26 percent at home, say they’re just using European Union rules allowing free movement of businesses and workers. The French builders’ inability to stop their Spanish counterparts from wresting business away highlights President Francois Hollande’s uphill battle to make France more competitive.

Meanwhile the the Bank of Canada has been instructed to say:

it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Inflation in Canada has moved further below the 2 per cent target, owing largely to significant excess supply in the economy and heightened competition in the retail sector. The path for inflation is now expected to be lower than previously anticipated for most of the projection period. The Bank expects inflation to return to the 2 per cent target in about two years, as the effects of retail competition dissipate and excess capacity is absorbed.

Global growth is expected to strengthen over the next two years, rising from 2.9 per cent in 2013 to 3.4 per cent in 2014 and 3.7 per cent in 2015. The United States will lead this acceleration, aided by diminishing fiscal drag, accommodative monetary policy and stronger household balance sheets. The improving U.S. outlook is affecting global bond, equity, and currency markets. Growth in other regions is evolving largely as projected in the Bank’s October Monetary Policy Report (MPR). Global trade growth plunged after 2011, but is poised to recover as global demand strengthens.

In Canada, growth improved in the second half of 2013. However, there have been few signs of the anticipated rebalancing towards exports and business investment. Stronger U.S. demand, as well as the recent depreciation of the Canadian dollar, should help to boost exports and, in turn, business confidence and investment. Meanwhile, recent data have been consistent with the Bank’s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income.

Real GDP growth is projected to pick up from 1.8 per cent in 2013 to 2.5 per cent in both 2014 and 2015. This implies that the economy will return gradually to capacity over the next two years.

Although the fundamental drivers of growth and future inflation appear to be strengthening, inflation is expected to remain well below target for some time, and therefore the downside risks to inflation have grown in importance. At the same time, risks associated with elevated household imbalances have not materially changed. Weighing these considerations, the Bank judges that the balance of risks remains within the zone articulated in October, and therefore has decided to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks.

All this had the same effect as a rate cut, with the loonie dropping:

The dollar plunged to the lowest in more than four years today and returns on Canada’s benchmark stock index were less than half of U.S. equities last year, underscoring an economy beset by the slowest rebound in exports since World War II. Consumers are tapped out with record household debt and governments are more focused on erasing budget deficits than providing stimulus.
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The dollar fell as much as 1 percent after Bank of Canada Governor Stephen Poloz said the direction of his next move will depend on the evolution of the economy, and a weaker currency should help the nation’s exporters.

Meanwhile, there was some good news for Air Canada:

Air Canada’s domestic pension plans have swung to a small surplus from a solvency deficit of $3.7-billion a year ago.

The airline said on Wednesday preliminary estimates indicate that its pension plans will be in a “small surplus position” at Jan. 1, 2014.

Elimination of the deficit came about as a result of several factors, including a 13.8 per cent return on investments last year; amended pension benefits that are estimated to have trimmed the deficit by about $970-million; contributions by Air Canada for the year of $225-million; and the application of an estimated prescribed discount rate of 3.9 per cent to calculate future obligations.

Air Canada booked a return of 11.8 per cent over the past four years, placing it in the first quartile for performance compared with large Canadian pension plans.

Finally comes the defence in the US vs. S&P lawsuit that we were all waiting for:

Government officials made no secret of their displeasure when Standard & Poor’s downgraded the debt of the United States in 2011.

But, according to Standard & Poor’s, that indignation led to more than harsh words. It also motivated the government’s lawsuit last year that accused S.& P. of fraud, the ratings agency claims.
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In a telephone call in August 2011, days after the downgrade was announced, an angry Mr. Geithner told Mr. McGraw that S.&P. had made an error in its assessment and that “you are accountable for that,” according to an affidavit by Mr. McGraw that was filed on Monday in United States District Court for the Central District of California.

“You have done an enormous disservice to yourselves and to your country,” Mr. Geithner said, according to Mr. McGraw. The conduct of S.&P. would be “looked at very carefully.”

A disservice to themselves … a disservice to the country … it’s a good thing that he didn’t mention “investors” or one might think he understood the role of Credit Rating Agencies.

There is speculation that yesterday’s RY new issue could open the floodgates:

Canadian banks are likely to sell more than $20-billion worth of new shares, now that investors have showed they can stomach a new style of securities.

This week Royal Bank of Canada became the first domestic lender to test investor appetite for a special type of preferred share that converts into common equity during a catastrophic crisis. The deal, originally for $200-million, sold out quickly, and was ultimately up-sized to $500-million, prompting rating agency Moody’s Investor Service to estimate that more than $20-billion worth of these shares will eventually hit the market.
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“We’ve all been waiting for the first bank to go ahead and do something,” Moody’s credit officer Dave Beattie said in an interview. Now that RBC has set a precedent, and a wildly popular one at that, “I would expect other people to follow the format pretty closely.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 42bp, FixedResets off 2bp and DeemedRetractibles gaining 11bp. BAM PerpetualDiscounts dominated the winning side of the Performance Highlights table. Volume was well above average.

PerpetualDiscounts now yield 5.67%, equivalent to 7.37% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.6%, so the pre-tax interest-equivalent spread is now about 275bp, a significant widening from the 265bp reported January 15.

Kevin Carmichael and Tara Perkins of the Globe are speculating about the next Superintendent of Financial Institutions:

Mark Zelmer, a former chief of the Bank of Canada’s financial stability department, represents OSFI at the Basel Committee on Banking Supervision, the global club of financial regulators that sets world banking standards, and has been taking on an increasingly public role in recent months.

The other deputy is Andrew Kriegler, who joined OSFI in February, 2013, after more than two decades on Bay Street, most recently as treasurer at Canadian Imperial Bank of Commerce.

Another possibility is Robert Kelly, chairman of Canada Mortgage and Housing Corp. and the former chief executive of Wall Street bank BNY Mellon, although he would presumably have to step down from his relatively new post at CMHC because OSFI regulates it.

The choice has added significance because Ottawa’s ranks of financial experts – a strength that helped Canada weather the financial crisis – are thinning quickly.

My guess? The one with least back-bone. As a second choice, the youngest one, who will have the most time to cash in on those lucrative financial sector directorships that ex-Superintendents get appointed to, for some odd reason.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets off 11bp and DeemedRetractibles gaining 14bp. The lengthy Performance Highlights table is dominated by losing FixedResets with low Issue Reset Spreads. Volume was high.

Who wants to buy some European bank shares? There might be some on sale soon!

European banks have a capital shortfall of as much as 767 billion euros ($1 trillion) before the European Central Bank’s probe into the financial health of the region’s lenders, according to a study.

French banks show the biggest gap of 285 billion euros, followed by German lenders with as much as 199 billion euros, Sascha Steffen of the European School of Management and Technology in Berlin and Viral Acharya at New York University said in their study dated Jan. 15. The figures assume a benchmark capital ratio for other book measures of leverage of 7 percent, they wrote.
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The authors see particularly high risks among German state-owned banks, or Landesbanken. “Germany has many government-owned institutions that may require capital issuances and/or bail-ins,” they wrote.

Spanish banks have a shortfall of 92 billion euros, while Italian banks lack 45 billion euros, the study showed.

Watch out for those rising interest rates:

Royal Bank of Canada, the country’s largest mortgage lender, has quietly cut some of its mortgage rates this weekend. The move appears to be part of a broader dip in rates, although economists generally still expect an increase in 2014.

Five-year fixed mortgage rates rose industry-wide for much of 2013, from their low of 2.64 per cent in April to their high of 3.39 per cent in September, according to Alyssa Richard, the chief executive officer of RateHub.ca. They edged down a bit later in the fall but had generally been steady at around 3.25 per cent since then.

RBC is now cutting its two-, three-, four– and five-year fixed mortgage rates each by 10 basis points. In an emailed statement, the bank said that some mortgage lenders have recently been pricing at lower rates, prompting it to move.

Royal Bank is often a price leader when it comes to mortgages, and other big banks frequently follow suit after it changes its prices. Its five-year fixed mortgage rate is now 3.69 per cent.

The numbers in that story don’t exactly add up all that well, and the Bank of Canada insists that a five year mortgage now runs at 5.14%. Whatever. The reason for the discrepancy, according to ratehub.ca, is:

While the Bank of Canada has the most comprehensive data set, with the high prevelance of mortgage rate discounting, it is not the most accurate. The Canadian Association of Accredited Mortgage Professionals estimates that the average discount applied to a 5 year mortgage rate in 2010 was 1.42%. To source the discounted rates, we have combined our proprietary data supplemented with discount brokerage data from 2006-2010.

They have a picture:

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Banks do this ridiculous posted-rate / discounted-rate thing because when you close out a mortgage early, you have to buy it back according to its posted rate, which is much more expensive than buying it back at the discounted rate. The US system, where the standard is a thirty year term with the mortgagee able to pay off at any time at par, is much better for home-owners – but of course, in the US there’s competition.

It was a mildly positive day for the Canadian preferred share market, with PerpetualDiscounts up 9bp, FixedResets winning 11bp and DeemedRetractibles gaining 6bp. Floaters fared poorly. The Performance Highlights table is notable for it’s heavy concentration of BAM issues … will you, won’t you, will you, won’t you, will you join the dance? Volume was above average.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 38bp, FixedResets gaining 11bp and DeemedRetractibles off 7bp. The BAM Floaters got hammered. TRP issues were prominent in the Performance Highlights table, perhaps adjusting themselves for the new issue that settles Monday. However, as the chart below shows, the four TRP issues are well-behaved in terms of Implied Volatility theory. Volume was very heavy.

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